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International Rectifier Corporation (NYSE:IRF)

F3Q 2011 Earnings Conference Call

May 2, 2011 5:00 p.m. EDT

Executives

Chris Toth – Investor Relations

Ilan Daskal – CFO, EVP

Oleg Khaykin – President, CEO, Director

Analysts

Steve Smigie – Raymond James

James Schneider – Goldman Sachs

Brian Piccioni – BMO Capital

Ramesh Misra – Brigantine Advisors

Craig Berger – FBR Capital Markets

Bill Ong – Merriman Capital

Stephen Chin – UBS

Operator

Good afternoon. My name is [Chanelle] and I will be your conference operator today.

At this time I would like to welcome everyone to the Fiscal Year 2011 Third Quarter Conference Call.

All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press star then the number 1 on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you.

I will now turn the conference over to Chris Toth with Investor Relations. Sir, you may begin.

Chris Toth

Thank you, [Chanelle], and good afternoon. If you have not already read through our press release issued earlier today, it can be found on our website at investor.irf.com in the Investor Relations section. Our quarterly report on Form 10-Q is expected to be filed with the SEC today, Monday 2, 2011, and can be accessed using the same web address.

This call is being broadcast over the internet and can also be found through the IRF web address. A conference call replay will be available following this call through May 9, 2011. After our prepared comments, we will open the line for questions.

Our discussion today will include some forward-looking statements made pursuant to the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995. We caution that such statements are subject to a number of uncertainties and actual results may differ materially. Risk factors that could affect the company's actual results are included in our press release issued today and the company's filings with the SEC, including the most recent forms 10-K and 10-Q.

Before we begin, I would also like to mention the following upcoming events. On May 10 we will be presenting at the JMP Securities' Research Conference in San Francisco, and on June 8 we will be attending the Raymond James Spring Investors' Conference in Boston.

Now, Ilan, will discuss our most recent financials. Ilan?

Ilan Daskal

Thank you, Chris. Good afternoon and thank you all for joining us.

For the third quarter of fiscal 2011, IR reported a revenue of $296.7 million, which was a 5.3% increase from the prior quarter and a 22.7% from the third quarter of fiscal year 2010. Revenue growth accelerated as we continued to see a healthy demand in the appliance, industrial and automotive end-markets. We also saw a good growth in the high-performance computing market.

Gross margin was 39.5% which was at the high end of our quarterly guidance. We reported a net income of $49.5 million or $0.69 per fully diluted share compared with $43.9 million or $0.62 per fully diluted share in the December quarter. The March quarter results included a $6.5 million gross tax benefit and a $3.5 million reversal of asset impairments, restructuring and other charges. Combined, these two items benefited fully diluted earnings per share by $0.14.

In the earnings per share calculation, please note that even though the company does pay dividends, accounting rules require us to allocate a portion of net income to any unvested restricted stock units, of which we could pay dividends equivalent. In the March quarter, the amount of net income excluded from the earnings per share calculation was about $733,000. If you do not make these adjustments, you will calculate the diluted earnings per share to be $0.01 higher than what we had reported.

For the March quarter, R&D expenses were $30.7 million which represented 10.4% of revenue. SG&A expenses were $46.7 million which represented 15.7% of revenue.

In light of the continued growth and demand that we see for our products, we do not intend to close any of our fabs for the foreseeable future. As a result, we have credited the remaining $3.5 million severance reserves.

Operating income for the quarter was $41.6 million and represented 14% of sales for the quarter. Other income net was $1.3 million in the March quarter and interest income net was $2.7 million, primarily from the sale of investments.

Income tax for the quarter was a $3.9 million benefit due primarily to a release of tax reserves and other discrete items totaling $6.5 million, which was partially offset by about $2.6 million in tax accruals in our foreign jurisdictions.

The total cash, cash equivalents and investments at the end of the third quarter was $490 million, which included $3 million of restricted cash. At the end of the March quarter, Level 3 investments were $9.3 million.

During the quarter we increased inventory by $17.5 million to $240.6 million. Weeks of inventory are now about 17-1/2 weeks. The largest increase was in die bank inventory as we replenished our stock to better position IR to respond to increasing demand over the next several quarters.

Cash from operating activities in the quarter was $3.9 million, lower than the last quarter, primarily from the increase in working capital. Cash capital expenditures were $38 million which was 12.8% of revenue. Depreciation and amortization expense was $19 million and stock-based compensation was $3.4 million. During the quarter we purchased 235,000 shares of our stock at the total cost of $7.7 million. We had 69.8 million shares outstanding at the end of the March quarter.

Moving on to our outlook, we currently expect revenue for the June quarter to be between $310 million and $320 million. For this projected revenue range, we currently estimate gross margin in the June quarter to be about 38%, primarily due to product mix.

With the inclusion of CHiL Semiconductor and other investments in new technologies, we expect R&D expenses to be about $33 million. SG&A expenses are expected to be about $49 million in the June quarter. Other expense net is expected to be about $1 million and interest income net is expected to be about $2 million.

Tax expense for the June quarter is expected to be about $2 million. For fiscal year 2012, we continue to expect a tax rate of approximately 10% as we will continue to utilize NOL carry-forwards, other deductions and tax credits to offset most of our taxable income.

And finally, for the June quarter, we expect our cash capital expenditures to be about $65 million, of which about $16 million is for our European implementation. The remainder of the CapEx is driven by capacity expansion in anticipation of future revenue growth.

Now, Oleg will give you the latest update on our business. Oleg.

Oleg Khaykin

Thank you, Ilan.

The March quarter marked the eighth consecutive quarter of revenue growth for IR. We executed well in our strategy and continue to experience growth even during the cyclical downturns. For the quarter, revenue was up 5.3% over the prior quarter and up 22.7% over the prior-year quarter. Gross margin was 39.5% as we benefited from the continued strong demand from our industrial and HiRel customers. EPS adjusted for tax benefits grew over 100% versus the prior-year quarter. And lastly, we successfully completed the acquisition of CHiL Semiconductor which further strengthens our leadership in digital power.

Geographically, North America and Europe posted solid growth momentum in the automotive and industrial end-markets, and Asia was particularly robust as we continued to see strong growth driven by appliance, automotive and industrial customers. During the most recent quarter, approximately 10% of our revenue were shipped into Japan.

We have a sales and administrative office in Tokyo and no direct or indirect manufacturing operations in Japan. To date we have not experienced any significant disruptions to our business as a result of recent events in Japan, nor do we currently anticipate that we will incur material impacts in the near term. That said, the situation is fluid and we believe that there is some element of risk that could impact our business over the next several quarters. That risk is factored into our guidance for the June quarter as well as the visibility for the second half of the year.

Moving on to our business units, the enterprise power business unit revenue increased 4.7% from the last quarter, driven by strong high-performance computing shipments to Tier 1 customers. Robust growth in high-performance computing was offset by normal seasonal declines in higher-margin server and communication markets.

The acquisition of CHiL Semiconductor expands IR's competitive position immediately in high-performance computing and graphics segments, and over the medium term in [VR12] servers, storage area networks, and notebook computing. CHiL revenues are already ramping nicely in performance desktops, [power and semi-bridge] CPUs, and in graphic arts. Long term we have -- we also see applicability of digital power to our other vertical market segments including energy-saving products, automotive products, and HiRel business units.

Our Power Management Devices business unit declined 7.5% from the prior quarter. This decline was driven by cyclical weakness in high-volume consumer and computing markets. However, we continue to see strong [designware] activity across a broad range of customers and expect to see very strong recovery and growth in this business unit in the June quarter and into the second half of calendar year.

Our Energy-Saving Products business unit revenue grew 17.9% over the last quarter to $74.3 million, driven by strong demand in appliances and industrial products. The rapid conversion to more energy-efficient appliances and industrial products is fueling the growth. IR has established a leadership position in motion control and IGBT technology, and we continue to see robust customer demand.

Our Automotive Products business unit grew 20.9% from the prior quarter to a new high of $30.9 million driven by robust demand across all geographies. We expect to continue to see strong growth in the segment of design wins over the past couple of years to ramp into production. And lastly, our HiRel business unit revenue grew 11.5% from the prior quarter to a new high of $52.5 million, driven by several large strategic customers.

Now, an update on channel inventories, during the March quarter, sell-through sales increase 5% and outpaced sell-in sales. This resulted in a drop in channel inventory to 8-1/2 weeks. Our target range for channel inventory remains 9 to 10 weeks. Lead times have continued to come down and we are back to normal for most of our products, but still remain extended in some areas.

Overall factory utilization remains about 90% during the quarter. Over the next several quarters we will bring -- we'll be bringing additional capacity online both internally and externally to support our expected growth.

In the June quarter we expect automotive and energy-saving products business units to continue growing, driven by strong customer demand. In energy-saving products, we are starting to see demand increase in consumer applications in addition to appliance and industrial. We also expect a strong increase in our enterprise business unit, driven by continued ramp of high-performance computing and graphics product, and cyclical recovery in servers. Lastly, our PMD business unit is expecting to see strong growth as high-volume computing and consumer demand recovers.

As Ilan indicated earlier, we expect robust resumption of revenue growth in the $310 million to $320 million range. Gross margin is expected to be about 38% as we start to see cyclical recovery in computing and consumer market demand.

In conclusion, barring any macroeconomic events, we have good visibility and strong growth momentum and are heading into the second half of the calendar year, and our long-term operating model remains intact. We are launching new technologies and products to reinforce our leadership position in our management. We continue to invest aggressively to position IR for success. I feel comfortable that we can continue to exceed industry growth rates both of our short and long-term timeframes.

This concludes our prepared remarks, we will now open the lines to your questions. Operator?

Question-and-Answer Session

Operator

As a reminder, if you would like to ask a question, press star then the number 1 on your telephone keypad. Again that is star 1 for any questions.

Your first question is from the line of Steve Smigie with Raymond James. Please go ahead with your question, sir.

Steve Smigie – Raymond James

Great. Thanks. And congratulations on [the mix] numbers. I was if you could comment a little bit here. You gave some pretty positive color even into the back half of the year. I was wondering if you could talk a little bit about how you see seasonality into the back half given that you're talking about a pretty positive outlook. So what would you consider to be seasonality these days and does what you said in your press release that you could potentially do somewhat better than that? Thanks.

Oleg Khaykin

Hi, Steve, it's Oleg. So you know my view on how this industry roughly operates, you kind of six quarters up, two quarters down. In fact, the lifecycle actually played out exactly that way. We had six quarters of expansion and then in December and March, the industry has seen some pullback associated with the inventory corrections.

Now it looks like June quarter is the resumption of the next cycle. I don’t know if it's going to be as steep as the last one, most likely not. But nevertheless we feel that the next cycle is starting in the June quarter. And the September quarter, which is the first quarter of the second half, is generally the strongest quarter, aided by seasonal demand ahead of the Christmas build. And since we are finding ourselves in the beginning of the cycle, that's why I said, if all goes well and there is no major macroeconomic events, the second half, which is really now the December quarter, even if it does good or maybe slightly less as good as September quarter, leads us to a much stronger view for the second half of the year.

We clearly have the visibility for the June quarter because we're already one month into it. The September quarter, you really make your conclusion because it's seasonally the strongest quarter for the industry. And given that we are in the first half of the expansion cycle for the industry, you can extrapolate the December quarter. That's the foundation of our assumptions on the second half of the year.

Steve Smigie – Raymond James

Great. Thanks for that color.

And then with regard to CapEx, you're taking up quite a bit. And if I understood what you said correctly, how long is it sustained? It's in the higher dollar levels. And is that expansion primarily to support the growth you're seeing in energy-saving products and auto, or is it also some PMD and other stuff as well?

Ilan Daskal

So, basically, Steve, most of the CapEx is for expansion and support of the product lines. A portion of it is obviously for the ERP implementation, roundabout $15 million. You will see it's still a little bit elevated as long as the ERP implementation is ongoing. Most likely for this calendar year, we plan to go live sometime in the second half of the calendar year. And in general, we still, if you exclude that, we still target the 11% -- around 11% of revenue for the overall CapEx.

Oleg Khaykin

And just to follow up on your question on where is the CapEx going by different business units, clearly our fabs produce a multitude of products, but by and large the type of technologies we are launching require significant new capabilities, and technologies are in appliances and industrial products, a large portion of the CapEx is going to support that specific growth. It mainly implies IGBT fabrication and a lot of the back-end module manufacturing.

Steve Smigie – Raymond James

Okay. I apologize, can I just squeeze one more thing just with regard to the revenue? The HiRel popped up from specific customers, is that just sort of like a one-quarter phenomenon that will back off? And then the jump in the power management devices and computing, is -- are there any tablets in that? Thanks, and I'll let other people take over. Thank you.

Oleg Khaykin

Well, our HiRel business unit has a strong underlying secular growth, but the last quarter in particular, some of the upsides were driven by several major programs where we had to make the shipments to. So I wouldn't say it will drop down back to where it was, but it'll probably be more muted, more in line with kind of gradual growth that we've been seeing in that market.

Chris Toth

Thanks, Steve. Next caller please?

Operator

Your next question is from the line of James Schneider with Goldman Sachs.

James Schneider – Goldman Sachs

Good afternoon. Thanks for taking my question.

On the inventory, obviously quite a decent build both last quarter and this quarter too, kind of in line or a little bit ahead of the revenue ramp. How should we think about your management of that inventory level going forward? Does it really just reflect the fact that you've got a lot of confidence in the back half kind of revenue growth? And are you still seeing tightness at your foundry partners that you mentioned as the reason for the inventory build last quarter?

Oleg Khaykin

Well, I think the, you know, retrospect, we've been seeing that there is a shortage of capacity looming in the kind of older most foundries. Even though there's still probably capacity available, 22-nanometer, 32-nanometer nodes, when you look at the 8-inch capacity kind of older notes, 0.18, 0.25, 0.35, there is not that much open capacity, and it was already getting pretty tight even in the downturn.

As a result, we took an advantage to pre-build some die bank in the December quarter when most of our competitors pulled back their orders, and we used the foundry capacity to that extent. And in the last quarter, as we saw June quarter materializing, we felt it's prudent for us to go and build more die banks. In retrospect, given everything that's happening in Japan, it had secondary benefits of us having more product on hand and being able to address some of the spot market demand that we have seen since.

Ilan Daskal

And Jim, just to add to what Oleg said regarding the overall inventory, the way we look at it is on inventory weeks in [auto and DNS], it's really on the absolute dollars. The prior quarter, the inventory weeks build jumped about four weeks from about 14 to about 18 weeks. And from December to March, it stayed about stable, remained about 17.5 to 18 weeks. So the additional build was definitely to support the growth that we see.

Oleg Khaykin

And lastly, we prefer not to put product into the channel because it reduces your ability to move the product from one distributor to another, if there is a demand -- a demand pops up, we prefer to keep more inventory in-house, and it gives us greater flexibility to respond to greater demand in different markets as opportunities arise.

James Schneider – Goldman Sachs

Okay, fair enough. That's very helpful.

And then secondly, on the gross margin guidance, you talked about a little bit of not being driven by mix in consumer and computing, those end-markets, is that also reflecting a mix in terms of the products themselves, like more discrete sold on to the spot market as you just mentioned, or how should we think about that?

Oleg Khaykin

Well, I think clearly there is discrete in all the vertical markets, and as the consumer segment picks up and computing segment picks up, on the one hand you have a much greater volume, on the other hand the ASPs are more aggressive. So clearly the general increase in computer and consumer markets is driving some of the growth in all of our segments, but that growth is coming in at a lower margin.

James Schneider – Goldman Sachs

Okay, great. Thanks very much.

Oleg Khaykin

Sure.

Operator

Your next question is from the line of Brian Piccioni with BMO Capital.

Brian Piccioni – BMO Capital

Hi, and great results. If we go back to the ERP comments, I would imagine, and I think you've mentioned this in the past, there's not only a capital spending aspect but there's also an operating expense impact. Would you care to quantify that for the quarter, the quarter you just reported?

Ilan Daskal

So, really, Brian, we don't break out a specific portion of the OpEx for the ERP implementation. Obviously it includes the OpEx portion that we have to spend mainly in SG&A. And I can tell you that that will continue and maybe slightly elevated in the second half once we have to invest more in training for the new ERP. But then it will roll off probably in 2012.

Brian Piccioni – BMO Capital

Okay. So it will, over the next few quarters, presumably go from being a net cost to a net benefit in terms of operating efficiencies and so on?

Ilan Daskal

Correct. And just if you look at the overall OpEx, I mean, we still try to maintain and target the overall spend level to our target model. So if you look, we are still within the R&D on the 10% to 11% and SG&A total to 15%. We were about 16.5% in this quarter. And that's kind of our overall goal. I mean there will be a slightly elevated amount for one quarter or two quarters due to training, but then it will go down back to the target model. And it's the same target model that we presented back in June.

Brian Piccioni – BMO Capital

Okay, great. And I was hoping if you could give us an update, Oleg, on how GaN is going, whether you're seeing any -- I know it's probably still not that material, but if you're getting traction with customers and the usual questions I ask every quarter.

Oleg Khaykin

Sure. So I think, as you probably have seen, we announced a 600-volt switch and a rectifier at the APEC Conference in early March. We are going to be taking this technology with additional [revs] into Nuremberg in early May. We have gotten significant interest pretty much from who's who in the industry, and we are currently in process of working with I would call alpha customers which is the customers who have deep depth of understanding and are leaders in the applications to iterate the technology further and adopt -- and optimize for the specific applications.

But we feel very good about our latest iteration of technology, and we are now able to demonstrate truly high-voltage performance with GaN. And that further gets IR in -- has opportunity for IR to get back into the high-voltage space with a new revolutionary technology. As you'll probably remember, IR has exited high-voltage space when we sold the business to Vishay about four years ago. And clearly that is one area that is very interesting, where we have very little presence today, and that's growing very rapidly. And we see GaN as an attractive vehicle for us to re-enter that space.

Brian Piccioni – BMO Capital

Great. Thank you.

Oleg Khaykin

Thank you, Brian.

Operator

Your next question is from the line of Ramesh Misra with Brigantine Advisors.

Ramesh Misra – Brigantine Advisors

Hi, good afternoon, gentlemen. In regards to the longer-term impact from Japan, are you seeing -- are you expecting any longer-term gains amongst customers over there as they might hope to diversify their supplier base?

Oleg Khaykin

Well, clearly I think what has happened in Japan has sent a warning to a lot of customers. Most customers on the consumer and industrial space usually have more than one source. So to that respect, they are less impacted. However, in automotive, my concern in the near term is, even though we don't have an impact on our production, but as you've seen with Toyota, to the extent they are missing one component, they can ship the cars. And that obviously impacts everybody else in the supply chain.

So I think -- I can clearly see in the automotive a much greater -- a greater awareness of making sure that you have geographically diversified sources, not necessarily company-wide diversified sources. And also, even though we do see opportunities to pick up the market, as I said, it's a double-edged sword. On one hand we may see an upside from one customer swapping our products for one of our competitors, and on the other hand we may see some orders that are being pushed out because the customers cannot get a full set of components necessary to manufacture.

That said, obviously as we see opportunities to help out, we also try to make sure that market share allocation sticks in longer term.

Ramesh Misra – Brigantine Advisors

Okay. Great, Oleg. In regards to automotive business, are you seeing any particular secular trends that could be benefiting IR in particular going forward, either from the blue diesel technologies or even the hybrid technologies? Is that something that IR hopes to target in the longer term?

Oleg Khaykin

Well, I mean we're already playing a significant role in diesel, in particular the glow plug part of the market. So clearly all these kind of higher efficiency, be it diesel, be it hybrid, be it electrical, be it electrical for mechanical substitution in steering and braking, we are finding ourselves in all those places where they need robust power switches and power management devices.

So in that respect, we are benefiting. Probably the greater benefit for us is ultimately when all the design wins that we've been picking up in the last two years starting to ramp into production. So, clearly secular trend is nice and it helps, but obviously new design wins ramping up presents even a more attractive growth momentum.

Ramesh Misra – Brigantine Advisors

Okay. And just a final one for me, were there extra costs related to the CHiL acquisition in the March quarter? And can you provide a sense of what was the proportion of contribution of revenues on a quarterly basis, either in the March quarter or in the June quarter going forward? And long term, does it contribute more to your enterprise power business or does it contribute more to your desktop business?

Ilan Daskal

So, Ramesh, for the quarter, we integrated it just a few weeks before the quarter closed. Revenue contributed about $400,000. So it's pretty minimal. Also a few hundred thousand on the OpEx side. As we guided for the June quarter ongoing, we expect about $3 million additional to the OpEx. We do not break out the revenue each time, but in the beginning it's going to contribute mainly to the enterprise power business unit. But definitely for the long term it's going to contribute for other businesses as well.

Oleg Khaykin

So I think as Ilan said, it's exactly right, initially the immediate contribution is to enterprise power and longer term to the others. In terms of the market segments, really it's, as a startup, they did what most startups do. They want to win the business that is quick to ramp up and gives them quick revenue and margin, so they focus by default a lot on the graphics and the computing markets. The reality of it is we've been working with them over the past two years on reference design for [VR12] platform, and the combination of IR power devices and their digital power controller offers by far the best performance both price and performance in the market, and we expect significant traction from the -- [our combo] to be in the [VR12] and the VR12.5 and the future platforms, and also as well, as you go into the storage area networks and other communication equipment.

Ramesh Misra – Brigantine Advisors

Okay, great. Thanks very much, gentlemen.

Oleg Khaykin

Thanks, Ramesh.

Ilan Daskal

Thank you, Ramesh.

Operator

Your next question is from the line of Craig Berger with FBR Capital Markets.

Craig Berger – FBR Capital Markets

Hey, guys. Thanks for taking my question.

Did you discuss why operating cash flows fell?

Ilan Daskal

So, the operating cash flow was about $3.9 million, and mainly due to the working capital. If you look at the balance sheet differences, you will see that working capital changes were about $50 million.

Craig Berger – FBR Capital Markets

I see. Let's see, next question, can you just talk to the increase in accounts receivable?

Ilan Daskal

So, a lot of the revenue was backend-loaded, and therefore you see the difference in the accounts receivable. That's the main driver there.

Oleg Khaykin

So it also bumped up the DSO to about 59 days.

Craig Berger – FBR Capital Markets

And is that typical for the March quarter?

Ilan Daskal

Yeah, I mean, many of the quarters are backend-loaded, but since you saw that we came in above the high end of the guidance, obviously it had a greater impact.

Craig Berger – FBR Capital Markets

Okay. On the gross margins, I know this has been asked a couple of times, but even if you do assume the mix changes, I still don't get to a gross margin as low as yours. And so I guess with higher revenues, can you just talk to why you think gross margins are going down further and then maybe what levers you can pull to get those gross margins towards 40%?

Oleg Khaykin

Well, I think, Craig, I think the new revenue is not necessarily just all incremental, there's also some turnover in the broader base to kind of take -- let's say, [2 96]. Some of the -- there's a churn also within that revenue in the mix between the kind of industrial towards more consumer space. So that obviously pulled the margin down.

And the other thing is clearly we've seen quite a big increase in the material. So, some of that higher-cost materials from the second half of last year is trickling through, is putting down some pressure, wiping some of the productivity gains that we have made in production.

That said, from my perspective, I'm not going to stop us to compromise and basically hold the revenue just to polish the margin. I will take the growth and then work afterwards to boost the operating efficiencies and deal with the cost of goods issue to further lower our costs, and we have plans in that regard as well. So my modus operandi, you got to make hay while the sun is shining, and I see the next several quarters as the opportunity to grab market share and grow, and in retrospect, in parallel, drive the cost of goods reduction by qualifying new sources of material and looking for other ways to offset the increase in commodity.

Ilan Daskal

And Craig, just to add to that, I mean we said already in the past that we try not to look at a specific quarter. I mean we look at four, five consecutive quarters. And if you just look at our fiscal year, including the guidance for the next quarter, you will get for fiscal year '11 about 39.5% to 40% gross margins. So overall we are extremely satisfied with the result here and the outlook. And we are still intact for the targeted model.

Craig Berger – FBR Capital Markets

Are you able to pass on any of those cost takes to downstream customers?

Oleg Khaykin

Well, I mean clearly there is a lot of discussion going on in the industry. I mean you're seeing major Chinese manufacturers looking at 30% to 40%, labor inflation. I mean the cost of materials are going up. And they're floating the [inaudible] to see if the price increases stick. We know the first people to really crack down and basically say it is what it is and mark up the material where the wafer suppliers and obviously the copper lead frame suppliers because copper has doubled in the last year and the wafer guys had allocation of products second half of last year. Obviously we are looking very carefully for opportunities to pass through the increases in materials through higher pricing. But it remains to be seen in the markets accept it. And clearly we've got to be mindful of the competitive pressures.

So it's one of these things that you watch the supply and demand, and if the opportunity presents itself, clearly -- my experience has been, in this industry, is that the cost ultimately do percolate all the way to the consumer but there is a lag between different links in the supply chain.

Craig Berger – FBR Capital Markets

I see. Last question and then I'll go away. On the energy-saving products, it had solid growth, big growth in the seasonally strong March quarter. You guys expect more growth there now. Can you talk to some of the competitive dynamics there, who are your competitors, and why are you seeing such tremendous strength in that segment?

Oleg Khaykin

Well I think that you got to start with the market fundamentals. And as I've been talking about, our enterprise -- so, our energy-saving products business unit, the primary markets for that are the variable speed motion which is in industrial drives and appliances. So clearly the mass transition to high efficiency technologies is driving the demand for our products. But also it includes LED, LCD and compact fluorescent lighting. So that also helps it. And to the extent you're looking at the next generation of [synth] panel displays that includes Class D audio as well as the LED backlighting and LCD backlighting, we are obviously playing a major role there as well.

The principal competitors here I mean range from the companies like [Insinium] clearly, and to also some extent, Fairchild, but also many Japanese customers who have -- who are vertically integrated, like Mitsubishi, Fuji, Toshibas of this world.

Chris Toth

Thanks, Craig. Next caller please?

Operator

Your next question is from the line of Bill Ong with Merriman Capital.

Bill Ong – Merriman Capital

Good afternoon, gentlemen. Congratulations on a solid quarter.

Oleg Khaykin

Thank you, Bill.

Bill Ong – Merriman Capital

I'd like to get some more insight on the CHiL Semiconductor acquisition which provides the digital power management solution that you talked about. We know that some of the power supply vendors are also offering a digital power management solution but more on the software level. So perhaps if you can talk about the hardware and software compatibility of digital power management that enables the end-customers to maximize the benefit without perhaps being viewed as competing or conflicting.

Oleg Khaykin

Sure. So, I think CHiL is actually a very much -- when you say software, are you talking about that it runs on some generic processor? Because actually CHiL has quite a bit of software in it as well.

Bill Ong – Merriman Capital

I understand that you do have software, but I guess from a power supply vendor like the [MFNs] or the [Power Ones], it's more software-centric and less hardware. So maybe -- you're both coming at different ends, so maybe you can help clarify how each one sort of measures?

Oleg Khaykin

Well, I mean clearly what we are targeting is the configurable solution where you take a CHiL controller with our drivers and power stages. And clearly in a lot of power management, being able to do it real-time with minimum delays is quite an important thing, and that ability to on-the-fly reconfigure and adjust the power is becoming very important. And I think what we like in CHiL is the very good real-time performance and ability to adapt on a flay and communicating -- the controller communicates with the processor.

So I think I probably would differentiate. When you think about digital power supply, a lot of the same components that you would see in the digital power switch is probably based on the components that we supply. So I think I understand which way you're going, but I think the, from what I see, all the digital solutions usually start off with something along the lines of CHiL controller and IR power stages, and then other customers add to it their value by providing the software layer that controls the controller and manages the power management on the board.

Bill Ong – Merriman Capital

Great. That's helpful. And nice job again.

Oleg Khaykin

Thanks.

Ilan Daskal

Thank you.

Operator

As a reminder, if you would like to ask a question, press star 1 at this time.

Your next question is from the line of Stephen Chin with UBS.

Stephen Chin – UBS

Thanks for taking my questions, and also I'd like to add my congrats on the strong results in the quarter and the outlook.

Oleg Khaykin

Thank you.

Stephen Chin – UBS

First question I have was on the notebook next quarter that you guys have in your enterprise power division, I think I may have missed some of the comments around that, but did you mention like quantitatively how much that was down from a seasonal standpoint in Q1? And what was your expectation for Q2?

Ilan Daskal

I don’t think, Steve, that we mentioned quantitatively. We just made the remarks about EP --

Oleg Khaykin

We talked about the revenue and growth --

Ilan Daskal

Specifically on the computing, no. I don’t --

Oleg Khaykin

For the computing, no. I think it was just total business unit. We did not discuss individual sub-segments.

Stephen Chin – UBS

Well, I guess in terms of your exposure to the semi-bridge platforms, are there still a number of programs that you have yet to ramp or is it -- are most of those products largely already up and running and it's just the seasonal growth that you're looking forward to over the next several quarters?

Oleg Khaykin

Steve, can you repeat the question? I'm not sure that it was clear here.

Stephen Chin – UBS

Yes, sure. In terms of the notebook exposure that you guys in your enterprise power division, I assume that you guys have a number of semi-bridge notebook platforms that you're currently designing to. I was wondering if the growth that you're expecting in the June quarter and second half of this year, is that just from existing wins that are already up and out there and just you're just seeing seasonality? Or is there an additional component of new programs that are yet to ramp helping to drive your growth there?

Oleg Khaykin

It's a combination of the platforms that have already been agreed and obviously the ones we are still working on. But most of the ones we talked about are already -- we already designed it.

Stephen Chin – UBS

Okay. So it's relatively balanced in terms of seasonality and the new ramps?

Oleg Khaykin

Yes.

Stephen Chin – UBS

Okay. And in reference to your comments regarding more design wins at some of your existing Tier 1 customers where some of this growth may be going from in the second half of the year, any comments on which positions or end-markets that your Tier 1 customers are coming from?

Oleg Khaykin

For which particular business unit or are you just saying in general?

Stephen Chin – UBS

In general.

Oleg Khaykin

Well, I think it's across -- I mean clearly in terms of the near term -- in terms of the time between design and production, it's the shortest in PMD and EP business units. So clearly computing is one area where we are seeing the most recent or ongoing design wins will result in revenue this year. On the automotive and energy-saving products, most of the design wins that are going to be ramping up later this year are probably the ones that have been designed in the past 12 to 24 months. And probably the only exception in that area would be the kind of flat panel displays in the consumer segment of the energy-saving products business unit.

Stephen Chin – UBS

Got it. And lastly, in terms of your gross margin target for your enterprise division, just given that the CHiL acquisition is now complete, do you have any updates, is there a long-term gross margin guidance on that division?

Oleg Khaykin

Well, I think our long-term guidance did not change, it's 40% to 50%. So depending on any given quarter, is the mix more heavily shifted towards computing, then it's going to be closer to 40. On any quarter where the mix is more heavily shifted towards communication servers, storage area networks, it's going to be closer to 50%.

Stephen Chin – UBS

Okay, great. Thank you.

Oleg Khaykin

Sure.

Ilan Daskal

Thanks, Steve.

Operator

Your next question is from Craig Berger with FBR Capital Markets.

Craig Berger – FBR Capital Markets

Hey, guys. Thanks for the follow-up.

Can you just talk about gross margin trends in HiRel, why were they up so much? And in enterprise power and automotive, why were they down?

Oleg Khaykin

Okay, on the HiRel, I mean that business unit is pretty much -- uses unique assets inside IR, so those costs are all allocated to that business unit, to the extent you cover your fixed costs and incremental revenue comes in at very high margin. Also within that business unit, there is really fundamentally two sub-segments. One is where you're shipping die or a discrete to your customer that has very little material. So as a result, the gross margin rate is very high.

Another segment is the modules where you procure a lot of the discrete [passive] components, the packaging and a lot of other type of materials including some of our competitors' ICs where you have a significant material content, so to the extent you ship more of those in any given quarter then, the margin is lower. So, last quarter we had a very strong mix of die shipments to a lot of customers who do internal manufacturing. And to the extent this quarter we're going to see a more balanced shift to the modules, the margins would come down. So the margins fluctuate based on the mix between the die/discrete and the modules.

Ilan Daskal

Basically, Craig, you see for HiRel about 10% incremental revenue growth, and with the much higher gross margin for this incremental revenue, there is an overall much higher gross margin for the quarter.

Oleg Khaykin

But that said, as revenue in that business grows, we'll be able to see better margins because we can ship much more products and more revenue from the existing base of assets. So to the extent we get more business, we'll get better and better fixed cost allocation.

On the -- you mentioned, what other business you asked about?

Craig Berger – FBR Capital Markets

Enterprise power.

Oleg Khaykin

So, enterprise power, a lot of it was mixed. In the December quarter we've seen a very strong drop in computing and consumer products side of the business, and that pretty much left servers and communication, sales and dollar revenue was down, the margins were very high. In the March quarter, we've seen lower demand from the server and communication customers but a much higher demand from the computing segment and thus the margins came in lower. As we see the server and communications market starting to come back this quarter, I mean I would imagine we'll see a different mix of margins.

Now with respect to automotive, there we've seen a significant pop in growth and a lot of the growth came from the more discrete side of the business versus the ICs, and that comes in at a lower margin. So it pulled the margin a little bit, but also we are ramping on several new technologies which are still coming up their yield curve, and as a result, have lower margins due to the scrap losses.

Craig Berger – FBR Capital Markets

I see. With regards to OpEx, how should we think about that over the rest of the year?

Ilan Daskal

So basically for next quarter you have the guidance. For the second half, on the SG&A, there will be a slightly elevated amount for once we implement the ERP, once we go live, for additional training. But overall, we continue with the targeted model of about 10% to 11% on the R&D and around 15% for the SG&A. I mean we still, even today with the ERP, around this target model.

Craig Berger – FBR Capital Markets

Last question, have you guys seen any hoarding or unusual customer take rates following the Japanese situation?

Oleg Khaykin

Well, it is a very good question. I mean actually the moment the Japanese disaster happened, we were keenly aware that somebody will try to take advantage of it. So we have been scrutinizing every order coming in. And we feel, while there were attempts at some of those things, I think they were very few and fine between. And we've pretty much caught I think at least all of them at this point.

And also to the extent that we've maintained greater sell-through than sell-in, we feel that there hasn't been too much opportunism taking place in the markets. But clearly you've got to look out, and I imagine as summer progresses. And I think the result, the fallout from the Japanese slowdown isn't probably going to hit the people towards the end of May through the end of June because there's still a lot of inventories from which products have been shipped. And I would imagine that probably opportunity to arbitrage the supply/demand may become stronger as the summer progresses.

Craig Berger – FBR Capital Markets

Thank you so much.

Oleg Khaykin

Sure.

Ilan Daskal

Thank you, Craig.

Operator

At this time there are no further questions. Do you have any closing comments?

Oleg Khaykin

Yes. Thank you for joining us today, and we look forward to seeing you all in the road in May and June. Thank you.

Operator

Thank, everyone, for joining today's conference call. You may now disconnect.

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